Question

​Toni's Typesetters is analyzing a possible merger with​ Pete's Print Shop. ​Toni's has a tax loss carryforward of $ 450,000​, which it could apply to​ Pete's expected earnings before taxes of ​$225,000 per year for the next 5 years. Using a 29​% tax​ rate, compare the earnings after taxes for​ Pete's over the next 5 years both without and with the merger.

Without the​ merger, Pete's Print​ Shop's earnings after taxes in years 1 through 5 is $_____. (Round to the nearest​ dollar.)

With the​ merger, the​ firm's earnings after taxes in year 1 is ​$____. (Round to the nearest​ dollar.)

With the​ merger, the earnings after taxes in year 2 is ​$______. (Round to the nearest​ dollar.)

With the​ merger, the earnings after taxes in years 3 through 5 is ​$____. Round to the nearest​ dollar.)

Answer 1

Solution

Tax rate= 29%

Petes earning before taxes = 225000

Eaning after taxes= earning before taxes*(1-tax rate)

Without the​ merger, Pete's Print​ Shop's earnings after taxes in years 1 through 5 is =earning before taxes(1-tax rate)

=225000*(1-.29)=$159750 each year

Now

After the merger the loss of Tony can be set off with the aernings of Pete

Therefore in the first year the earning before taxes for pete = 225000.Now total carry forward loss for Tony =450000.Therefore out of this 450000 ,225000 loss when added to pete earning of 225000 will make the tax liability =0 for first year

So

With the​ merger, the​ firm's earnings after taxes in year 1 is $225000

Similarly the remaining carry forward loss of tony is 225000 ,will be set off against 2nd ear earning of pete therefore 0 tax liabilty in second year too

With the​ merger, the earnings after taxes in year 2 is $225000

Now since all the carryforward loss has been setoff,therefore for years 3 to 5 the :-

Eaning after taxes= earning before taxes*(1-tax rate)

Therefore

With the​ merger, the earnings after taxes in years 3 through 5 is =225000*(1-.29)=$159750 each year

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